The Labor Market Threatens to Be an Ongoing Thorn in this Recovery

The update on new fillings for unemployment benefits is cheery once again, at least in trend if not absolute numbers. Initial jobless claims dipped to 530,000 last week, the lowest since mid-July and sharply below the peak for this cycle—674,000 for the week through March 28, 2009.

The downward trend suggests that the recession is over, but we’re still waiting for some corroborating support, including continuing claims, which remain elevated. The implication: businesses are laying off fewer workers (initial claims) but those who are already receiving jobless benefits aren’t finding work (continuing claims).

In search of clues that the economy’s headed for a recovery that includes minting new jobs we’re keeping an eye on the trend in initial jobless claims relative to continuing claims. Our second chart below offers a window on that front by indexing the two data series for direct comparison. (Note that continuing claims are reported with a one-week lag to initial claims and so to maintain consistency the graph below runs through Sep. 12.)

For the moment, there’s not much downward movement in continuing claims. That’s coming, or so we think, but the question is, When? And at what pace?

Our expectations are modest, at best, these days. The labor market threatens to be an ongoing thorn in this recovery. The crowd doesn’t yet understand this point…yet. The accumulation of household debt and the ongoing financial repair that’s necessary to offset the hefty consumption bills of the past several years will conspire with a skittish corporate mindset to keep growth in the labor market abnormally shallow for the foreseeable future.

Let’s hope your editor’s wrong. Meantime, the next big clue comes on October 2, when the September payrolls report is released. Will we finally see a gain after 20 straight months of loss? No comment, although judging by yesterday’s monthly report on mass layoffs—such “events” went up by 25% in August—one might wonder if negative momentum is gaining strength.

But what of all the monetary and fiscal stimulus? Will the government’s efforts to juice the economy start kicking in? How will we know if the plan is working? Watch consumer discretionary spending, economist Bob Dieli of the consultancy NoSpinForecast.com tells the Capital Spectator. More than two-thirds of the American economy is based on consumer spending. If the stimulus has any chance of dispensing a positive impact, it’s likely to show up in personal consumption expenditures (PCE), he explains.

The latest PCE report tells us that consumer spending rose 0.2% in July over the previous month. That’s a modest change, at best. Will the rest of year fare any better? The next installment on an answer arrives October 1, when the August PCE numbers are released. Dieli says if PCE growth is 0.5% on a “sustained basis” for the rest of year, that will go a long way in support of the argument that the stimulus is working.

What about payroll employment? Consumer spending ultimately depends on a healthy labor market. Dieli says that a labor market that’s at least treading water if not creating jobs in the remaining months of 2009 would offer further evidence that the stimulus spending is productive. But reaching even that modest goal may prove challenging in the immediate future.

A worrisome sign is the sharp 6.6% jump in labor productivity in this year’s second quarter, according to the Labor Department. That’s the highest rate since 2003 and it suggests that corporate America is learning how to produce more goods and services without expanding the payrolls. That’s not encouraging. Nonfarm payrolls in the U.S. fell by 216,000 in August, as they have for every month starting in January 2008. Sure, last month’s loss is smallest this year, and in that sense it’s a step in the right direction. But the best you can say at the moment is that jobs are disappearing at slowing rate.

James Picerno is a financial journalist who has been writing about finance and investment theory for more than twenty years. He writes for trade magazines read by financial professionals and financial advisers.

Over the years, he’s written for the Wall Street Journal, Barron’s, Bloomberg, Dow Jones, Reuters.